1. Choose a discount rate that is appropriate to the riskiness and the duration of the cash flows being discounted. Uncle Simon’s promise of $100 per year for 5 years is assumed to be as good as the promise of your local bank, which pays 6% on its savings accounts. Therefore 6% is an appropriate discount rate. A good rule of thumb is that the larger the riskiness of the cash flows, the larger the discount rate. Precise formulations of this rule of thumb will have to wait for Part 2 of this book, in particular Chapter 12.